[Federal Register Volume 84, Number 95 (Thursday, May 16, 2019)]
[Notices]
[Pages 22214-22221]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10116]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85837; File No. SR-PEARL-2019-17]


Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX 
PEARL Fee Schedule

May 10, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 30, 2019, MIAX PEARL, LLC (``MIAX PEARL'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend the MIAX PEARL Fee 
Schedule (the ``Fee Schedule'') to modify certain of the Exchange's 
system connectivity fees.
    The Exchange initially filed the proposal on March 1, 2019 (SR-
PEARL-2019-08). That filing has been withdrawn and replaced with the 
current filing (SR-PEARL-2019-17).
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX 
PEARL's principal office, and at the Commission's Public Reference 
Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

[[Page 22215]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend the Fee Schedule regarding 
connectivity to the Exchange. Specifically, the Exchange proposes to 
amend Sections 5a) and b) of the Fee Schedule to increase the network 
connectivity fees for the 1 Gigabit (``Gb'') fiber connection, the 10Gb 
fiber connection, and the 10Gb ultra-low latency (``ULL'') fiber 
connection, which are charged to both Members \3\ and non-Members of 
the Exchange for connectivity to the Exchange's primary/secondary 
facility. The Exchange also proposes to increase the network 
connectivity fees for the 1Gb and 10Gb fiber connections for 
connectivity to the Exchange's disaster recovery facility. Each of 
these connections are shared connections, and thus can be utilized to 
access both the Exchange and the Exchange's affiliate, Miami 
International Securities Exchange, LLC (``MIAX''). These proposed fee 
increases are collectively referred to herein as the ``Proposed Fee 
Increases.''
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    \3\ The term ``Member'' means an individual or organization that 
is registered with the Exchange pursuant to Chapter II of the 
Exchange's Rules for purposes of trading on the Exchange as an 
``Electronic Exchange Member'' or ``Market Maker.'' Members are 
deemed ``members'' under the Exchange Act. See Exchange Rule 100.
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    The Exchange initially filed the Proposed Fee Increases on July 31, 
2018, designating the Proposed Fee Increases effective August 1, 
2018.\4\ The First Proposed Rule Change was published for comment in 
the Federal Register on August 13, 2018.\5\ The Commission received one 
comment letter on the proposal.\6\ The Proposed Fee Increases remained 
in effect until they were temporarily suspended pursuant to a 
suspension order (the ``Suspension Order'') issued by the Commission on 
September 17, 2018.\7\ The Suspension Order also instituted proceedings 
to determine whether to approve or disapprove the proposed rule 
change.\8\
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    \4\ See Securities Exchange Act Release No. 83785 (August 7, 
2018), 83 FR 40101 (August 13, 2018) (SR-PEARL-2018-16). (The 
``First Proposed Rule Change'').
    \5\ Id.
    \6\ See Letter from Tyler Gellasch, Executive Director, The 
Healthy Markets Association, to Brent J. Fields, Secretary, 
Commission, dated September 4, 2018 (``Healthy Markets Letter'').
    \7\ See Securities Exchange Act Release No. 34-84177 (September 
17, 2018).
    \8\ Id.
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    The Healthy Markets Letter argued that the Exchange did not provide 
sufficient information in its filing to support a finding that the 
proposal is consistent with the Act. Specifically, the Healthy Markets 
Letter objected to the Exchange's reliance on the fees of other 
exchanges to demonstrate that its fee increases are consistent with the 
Act. In addition, the Healthy Markets Letter argued that the Exchange 
did not offer any details to support its basis for asserting that the 
Proposed Fee Increases are consistent with the Act.
    On October 5, 2018, the Exchange withdrew the First Proposed Rule 
Change.\9\ The Exchange refiled the Proposed Fee Increases on September 
18, 2018, designating the Proposed Fee Increases immediately 
effective.\10\ The Second Proposed Rule Change was published for 
comment in the Federal Register on October 10, 2018.\11\ The Commission 
received one comment letter on the proposal.\12\ The Proposed Fee 
Increases remained in effect until they were temporarily suspended 
pursuant to a suspension order (the ``Second Suspension Order'') issued 
by the Commission on October 3, 2018.\13\ The Second Suspension Order 
also instituted proceedings to determine whether to approve or 
disapprove the Second Proposed Rule Change.\14\
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    \9\ See Securities Exchange Act Release No. 84397 (October 10, 
2018), 83 FR 52272 (October 16, 2018) (SR-PEARL-2018-16).
    \10\ See Securities Exchange Act Release No. 84358 (October 3, 
2018), 83 FR 51022 (October 10, 2018) (SR-PEARL-2018-19). (The 
``Second Proposed Rule Change'').
    \11\ Id.
    \12\ See Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel, and Ellen Greene, Managing Director 
Financial Services Operations, The Securities Industry and Financial 
Markets Association (``SIFMA''), to Brent J. Fields, Secretary, 
Commission, dated October 15, 2018 (``SIFMA Letter'').
    \13\ See supra note 10.
    \14\ Id.
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    The SIFMA Letter argued that the Exchange did not provide 
sufficient information in its filing to support a finding that the 
proposal should be approved by the Commission after further review of 
the proposed fee increases. Specifically, the SIFMA Letter objected to 
the Exchange's reliance on the fees of other exchanges to justify its 
own fee increases. In addition, the SIFMA Letter argued that the 
Exchange did not offer any details to support its basis for asserting 
that the Proposed Fee Increases are reasonable. On November 23, 2018, 
the Exchange withdrew the Second Proposed Rule Change.\15\
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    \15\ See Securities Exchange Act Release No. 84651 (November 26, 
2018), 83 FR 61687 (November 30, 2018) (SR-PEARL-2018-19).
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    The Exchange refiled the Proposed Fee Increases on March 1, 2019, 
designating the Proposed Fee Increases immediately effective.\16\ The 
Third Proposed Rule Change was published for comment in the Federal 
Register on March 20, 2019.\17\ The Third Proposed Rule Change provided 
new information, including additional detail about the market 
participants impacted by the Proposed Fee Increases, as well as the 
additional costs incurred by the Exchange associated with providing the 
connectivity alternatives, in order to provide more transparency and 
support relating to the Exchange's belief that the Proposed Fee 
Increases are reasonable, equitable, and non-discriminatory, and to 
provide sufficient information for the Commission to determine that the 
Proposed Fee Increases are consistent with the Act.
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    \16\ See Securities Exchange Act Release No. 85318 (March 14, 
2019), 84 FR 10363 (March 20, 2019) (SR-MIAX-2019-10) (the ``Third 
Proposed Rule Change'') (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule).
    \17\ Id.
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    On March 29, 2019, the Commission issued its Order Disapproving 
Proposed Rule Changes to Amend the Fee Schedule on the BOX Market LLC 
Options Facility to Establish BOX Connectivity Fees for Participants 
and Non-Participants Who Connect to the BOX Network (the ``BOX 
Order'').\18\ In the BOX Order, the Commission highlighted a number of 
deficiencies it found in three separate rule filings by BOX Exchange 
LLC (``BOX'') to increase BOX's connectivity fees that prevented the 
Commission from finding that BOX's proposed connectivity fees were 
consistent with the Act. These deficiencies relate to topics that the 
Commission believes should be discussed in a connectivity fee filing.
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    \18\ See Securities Exchange Act Release No. 85459 (March 29, 
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37, 
and SR-BOX-2019-04).
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    After the BOX Order was issued, the Commission received four 
comment letters on the Third Proposed Rule Change.\19\
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    \19\ See Letter from Joseph W. Ferraro III, SVP & Deputy General 
Counsel, MIAX, to Vanessa Countryman, Acting Secretary, Commission, 
dated April 5, 2019 (``MIAX Letter''); Letter from Theodore R. Lazo, 
Managing Director and Associate General Counsel, SIFMA, to Vanessa 
Countryman, Acting Secretary, Commission, dated April 10, 2019 
(``Second SIFMA Letter''); Letter from John Ramsay, Chief Market 
Policy Officer, Investors Exchange LLC, to Vanessa Countryman, 
Acting Secretary, Commission, dated April 10, 2019 (``IEX Letter''); 
and Letter from Tyler Gellasch, Executive Director, Healthy Markets, 
to Brent J. Fields, Secretary, Commission, dated April 18, 2019 
(``Second Healthy Markets Letter'').
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    The Second SIFMA Letter argued that the Exchange did not provide 
sufficient information in its Third Proposed Rule Change to support a 
finding that the

[[Page 22216]]

proposal should be approved by the Commission after further review of 
the proposed fee increases. Specifically, the Second SIFMA Letter 
argued that the Exchange's market data fees and connectivity fees were 
not constrained by competitive forces, the Exchange's filing lacked 
sufficient information regarding cost and competition, and that the 
Commission should establish a framework for determining whether fees 
for exchange products and services are reasonable when those products 
and services are not constrained by significant competitive forces.
    The IEX Letter argued that the Exchange did not provide sufficient 
information in its Third Proposed Rule Change to support a finding that 
the proposal should be approved by the Commission and that the 
Commission should extend the time for public comment on the Third 
Proposed Rule Change. Despite the objection to the Proposed Fee 
Increases, the IEX Letter did find that ``MIAX has provided more 
transparency and analysis in these filings than other exchanges have 
sought to do for their own fee increases.'' \20\ The IEX Letter 
specifically argued that the Proposed Fee Increases were not 
constrained by competition, the Exchange should provide data on the 
Exchange's actual costs and how those costs relate to the product or 
service in question, and whether and how MIAX considered changes to 
transaction fees as an alternative to offsetting exchange costs.
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    \20\ See IEX Letter, pg. 1.
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    The Second Healthy Markets Letter did not object to the Third 
Proposed Rule Change and the information provided by the Exchange in 
support of the Proposed Fee Increases. Specifically, the Second Healthy 
Markets Letter stated that the Third Proposed Rule Change was 
``remarkably different,'' and went on to further state as follows:

    The instant MIAX filings--along with their April 5th 
supplement--provide much greater detail regarding users of 
connectivity, the market for connectivity, and costs than the 
Initial MIAX Filings. They also appear to address many of the issues 
raised by the Commission staff's BOX disapproval order. This third 
round of MIAX filings suggests that MIAX is operating in good faith 
to provide what the Commission and staff seek.\21\ On April 29, 
2019, the Exchange withdrew the Third Proposed Rule Change.\22\
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    \21\ See Second Healthy Markets Letter, pg. 2.
    \22\ See SR-PEARL-2019-08).

    The Exchange is now re-filing the Proposed Fee Increases to 
squarely and comprehensively address each and every topic raised for 
discussion in the BOX Order, the IEX Letter and the Second SIFMA Letter 
to ensure that the Proposed Fee Increases are reasonable, equitable, 
and non-discriminatory, and that the Commission should find that the 
Proposed Fee Increases are consistent with the Act. The proposed rule 
change is immediately effective upon filing with the Commission 
pursuant to Section 19(b)(3)(A) of the Act.
    The Exchange currently offers various bandwidth alternatives for 
connectivity to the Exchange to its primary and secondary facilities, 
consisting of a 1Gb fiber connection, a 10Gb fiber connection, and a 
10Gb ULL fiber connection. The 10Gb ULL offering uses an ultra-low 
latency switch, which provides faster processing of messages sent to it 
in comparison to the switch used for the other types of connectivity. 
The Exchange currently assesses the following monthly network 
connectivity fees to both Members and non-Members for connectivity to 
the Exchange's primary/secondary facility: (a) $1,100 for the 1Gb 
connection; (b) $5,500 for the 10Gb connection; and (c) $8,500 for the 
10Gb ULL connection. The Exchange also assesses to both Members and 
non-Members a monthly per connection network connectivity fee of $500 
for each 1Gb connection to the disaster recovery facility and a monthly 
per connection network connectivity fee of $2,500 for each 10Gb 
connection to the disaster recovery facility.
    The Exchange's MIAX Express Network Interconnect (``MENI'') can be 
configured to provide Members and non-Members of the Exchange network 
connectivity to the trading platforms, market data systems, test 
systems, and disaster recovery facilities of both the Exchange and its 
affiliate, MIAX, via a single, shared connection. Members and non-
Members utilizing the MENI to connect to the trading platforms, market 
data systems, test systems and disaster recovery facilities of the 
Exchange and MIAX via a single, shared connection are assessed only one 
monthly network connectivity fee per connection, regardless of the 
trading platforms, market data systems, test systems, and disaster 
recovery facilities accessed via such connection.
    The Exchange proposes to increase the monthly network connectivity 
fees for such connections for both Members and non-Members. The network 
connectivity fees for connectivity to the Exchange's primary/secondary 
facility will be increased as follows: (a) From $1,100 to $1,400 for 
the 1Gb connection; (b) from $5,500 to $6,100 for the 10Gb connection; 
and (c) from $8,500 to $9,300 for the 10Gb ULL connection. The network 
connectivity fees for connectivity to the Exchange's disaster recovery 
facility will be increased as follows: (a) From $500 to $550 for the 
1Gb connection; and (b) from $2,500 to $2,750 for the 10Gb connection.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \23\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \24\ in 
particular, in that it provides for the equitable allocation of 
reasonable dues, fees and other charges among Exchange Members and 
issuers and other persons using any facility or system which the 
Exchange operates or controls. The Exchange also believes the proposal 
furthers the objectives of Section 6(b)(5) of the Act \25\ in that it 
is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general to protect 
investors and the public interest and is not designed to permit unfair 
discrimination between customer, issuers, brokers and dealers.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(4).
    \25\ 15 U.S.C. 78f(b)(5).
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    First, the Exchange believes that its proposal is consistent with 
Section 6(b)(4) of the Act, in that the Proposed Fee Changes are fair, 
equitable and not unreasonably discriminatory, because the fees for the 
connectivity alternatives available on the Exchange, as proposed to be 
increased, are competitive and market-driven. The U.S. options markets 
are highly competitive (there are currently 16 options markets) and a 
reliance on competitive markets is an appropriate means to ensure 
equitable and reasonable prices.
    The Exchange acknowledges that there is no regulatory requirement 
that any market participant connect to the Exchange, or that any 
participant connect at any specific connection speed. The rule 
structure for options exchanges are, in fact, fundamentally different 
from those of equities exchanges. In particular, options market 
participants are not forced to connect to (and purchase market data 
from) all options exchanges, as shown by the number of Members of MIAX 
PEARL as compared to the much greater number of members at other 
options exchanges (as further detailed below). Not only does MIAX PEARL 
have less than half the number of members as certain other options 
exchanges, but there are also a number of the Exchange's Members that 
do not connect directly to MIAX

[[Page 22217]]

PEARL. Further, of the number of Members that connect directly to MIAX 
PEARL, many such Members do not purchase market data from MIAX PEARL. 
There are a number of large market makers and broker-dealers that are 
members of other options exchange but not Members of MIAX PEARL. For 
example, the following are not Members of MIAX PEARL: The D.E. Shaw 
Group, CTC, XR Trading LLC, Hardcastle Trading AG, Ronin Capital LLC, 
Belvedere Trading, LLC, Bluefin Trading, and HAP Capital LLC. In 
addition, of the market makers that are connected to MIAX PEARL, it is 
the individual needs of the market maker that require whether they need 
one connection or multiple connections to the Exchange. The Exchange 
has market maker Members that only purchase one connection (10Gb or 
10Gb ULL) and the Exchange has market maker Members that purchase 
multiple connections. It is all driven by the business needs of the 
market maker. Market makers that are consolidators that target resting 
order flow tend to purchase more connectivity that market makers that 
simply quote all symbols on the Exchange. Even though non-Members 
purchase and resell 10Gb and 10Gb ULL connections to both Members and 
non-Members, no market makers currently connect to the Exchange 
indirectly through such resellers.
    SIFMA's argument that all broker-dealers are required to connect to 
all exchanges is not true in the options markets. The options markets 
have evolved differently than the equities markets both in terms of 
market structure and functionality. For example, there are many order 
types that are available in the equities markets that are not utilized 
in the options markets, which relate to mid-point pricing and pegged 
pricing which require connection to the SIPs and each of the equities 
exchanges in order to properly execute those orders in compliance with 
best execution obligations. In addition, in the options markets there 
is a single SIP (OPRA) versus two SIPs in the equities markets, 
resulting in few hops and thus alleviating the need to connect directly 
to all the options exchanges. Additionally, in the options markets, the 
linkage routing and trade through protection are handled by the 
exchanges, not by the individual members. Thus not connecting to an 
options exchange or disconnecting from an options exchange does not 
potentially subject a broker-dealer to violate order protection 
requirements as suggested by SIFMA. Gone are the days when the retail 
brokerage firms (the Fidelity's, the Schwab's, the eTrade's) were 
members of the options exchanges--they are not members of MIAX PEARL or 
its affiliates, MIAX and MIAX Emerald, they do not purchase 
connectivity to MIAX PEARL, and they do not purchase market data from 
MIAX PEARL. The Exchange further recognizes that the decision of 
whether to connect to the Exchange is separate and distinct from the 
decision of whether and how to trade on the Exchange. The Exchange 
acknowledges that many firms may choose to connect to the Exchange, but 
ultimately not trade on it, based on their particular business needs.
    To assist prospective Members or firms considering connecting to 
MIAX PEARL, the Exchange provides information about the Exchange's 
available connectivity alternatives.\26\ The decision of which type of 
connectivity to purchase, or whether to purchase connectivity at all 
for a particular exchange, is based on the business needs of the firm. 
For example, if the firm wants to receive the top-of-market data feed 
product or depth data feed product, due to the amount/size of data 
contained in those feeds, such firm would need to purchase either the 
10Gb or 10Gb ULL connection. The 1Gb connection is too small to support 
those data feed products. MIAX PEARL notes that there are twelve (12) 
Members that only purchase the 1Gb connectivity alternative. Thus, 
while there is a meaningful percentage of purchasers of only 1Gb 
connections (12 of 33), by definition, those twelve (12) members 
purchase connectivity that cannot support the top-of-market data feed 
product or depth data feed product and thus they do not purchase such 
data feed products. Accordingly, purchasing market data is a business 
decision/choice, and thus the pricing for it is constrained by 
competition.
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    \26\ See the MIAX Connectivity Guide at https://www.miaxoptions.com/sites/default/files/page-files/MIAX_Connectivity_Guide_v3.6_01142019.pdf.
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    Contrary to SIFMA's argument, there is competition for connectivity 
to MIAX PEARL and its affiliates. MIAX PEARL competes with nine (9) 
non-Members who resell MIAX PEARL connectivity. Those non-Members 
resell that connectivity to multiple market participants over that same 
connection, including both Members and non-Members of MIAX PEARL 
(typically extranets and service bureaus). When connectivity is re-sold 
by a third-party, MIAX PEARL does not receive any connectivity revenue 
from that sale. It is entirely between the third-party and the 
purchaser, thus constraining the ability of MIAX PEARL to set its 
connectivity pricing as indirect connectivity is a substitute for 
direct connectivity. There are currently nine (9) non-Members that 
purchase connectivity to MIAX PEARL and/or MIAX. Those non-Members 
resell that connectivity to eleven (11) customers, some of whom are 
agency broker-dealers that have tens of customers of their own. Some of 
those eleven (11) customers also purchase connectivity directly from 
MIAX PEARL and/or MIAX. Accordingly, indirect connectivity is a viable 
alternative that is already being used by non-Members of MIAX PEARL, 
constraining the price that MIAX PEARL is able to charge for 
connectivity to its Exchange.
    The Exchange \27\ and MIAX \28\ are comprised of 41 distinct 
Members between the two exchanges, excluding any additional affiliates 
of such Members that are also Members of MIAX PEARL, MIAX, or both. Of 
those 41 distinct Members, 33 Members have purchased the 1Gb, 10Gb, 
10Gb ULL connections or some combination of multiple various 
connections. Furthermore, every Member who has purchased at least one 
connection also trades on the Exchange, MIAX, or both, with the 
exception of one new Member who is currently in the on-boarding 
process. The 8 remaining Members who have not purchased any 
connectivity to the Exchange are still able to trade on the Exchange 
indirectly through other Members or non-Member service bureaus that are 
connected. These 8 Members who have not purchased connectivity are not 
forced or compelled to purchase connectivity, and they retain all of 
the other benefits of Membership with the Exchange. Accordingly, 
Members have the choice to purchase connectivity and are not compelled 
to do so in any way.
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    \27\ MIAX PEARL has 36 distinct Members, excluding affiliated 
entities. See MIAX PEARL Exchange Member Directory, available at 
https://www.miaxoptions.com/exchange-members/pearl.
    \28\ MIAX has 38 distinct Members, excluding affiliated 
entities. See MIAXExchange [sic] Member Directory, available at 
https://www.miaxoptions.com/exchange-members.
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    The Exchange believes that the Proposed Fee Changes are fair, 
equitable and not unreasonably discriminatory because the connectivity 
pricing is associated with relative usage of the various market 
participants and does not impose a barrier to entry to smaller 
participants. Accordingly, the Exchange offers three direct 
connectivity alternatives and various indirect connectivity (via third-
party) alternatives, as described above. MIAX

[[Page 22218]]

PEARL recognizes that there are various business models and varying 
sizes of market participants conducting business on the Exchange. The 
1Gb direct connectivity alternative is 1/10th the size of the 10Gb 
direct connectivity alternative. Approximately just less than half of 
MIAX PEARL and MIAX Members that connect (14 out of 33) purchase 1Gb 
connections. The 1Gb direct connection can support the sending of 
orders and the consumption of all market data feed products, other than 
the top-of-market data feed product or depth data feed product (which 
require a 10Gb connection). The 1Gb direct connection is generally 
purchased by market participants that utilize less bandwidth. The 
market participants that purchase 10Gb ULL direct connections utilize 
the most bandwidth, and those are the participants that consume the 
most resources from the network. Accordingly, the Exchange believes the 
allocation of the Proposed Fee Increases ($9,300 for a 10Gb ULL 
connection versus $1,400 for a 1Gb connection) are reasonable based on 
the network resources consumed by the market participants--lowest 
bandwidth consuming members pay the least, and highest bandwidth 
consuming members pays the most, particularly since higher bandwidth 
consumption translates to higher costs to the Exchange. The 10Gb ULL 
connection offers optimized connectivity for latency sensitive 
participants and is approximately single digit microseconds faster in 
round trip time for connection oriented traffic to the Exchange than 
the 10Gb connection. This lower latency is achieved through more 
advanced network equipment, such as advanced hardware and switching 
components, which translates to increased costs to the Exchange. Market 
participants that are less latency sensitive can purchase 10Gb direct 
connections and quote in all products on the Exchange and consume all 
market data feeds, and such 10Gb direct connections are priced lower 
than the 10Gb ULL direct connections, offering smaller sized market 
makers a lower cost alternative.
    With respect to options trading, the Exchange had only 4.82% market 
share of the U.S. options industry in Equity/ETF classes according to 
the OCC in 2018.\29\ For all of 2018, the Exchange's affiliate, MIAX 
had only 4.39% market share of the U.S. options industry in Equity/ETF 
classes according to the OCC.\30\ The Exchange is aware of no evidence 
that a combined market share of less than 10% provides the Exchange 
with anti-competitive pricing power. This, in addition to the fact that 
not all broker-dealers are required to connect to all options 
exchanges, supports the Exchange's conclusion that its pricing is 
constrained by competition.
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    \29\ See Exchange Market Share of Equity Products--2018, The 
Options Clearing Corporation, available at https://www.theocc.com/webapps/exchange-volume.
    \30\ Id.
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    Separately, the Exchange is not aware of any reason why market 
participants could not simply drop their connections and cease being 
Members of the Exchange if the Exchange were to establish unreasonable 
and uncompetitive price increases for its connectivity alternatives. 
Market participants choose to connect to a particular exchange and 
because it is a choice, MIAX PEARL must set reasonable connectivity 
pricing, otherwise prospective members would not connect and existing 
members would disconnect or connect through a third-party reseller of 
connectivity. No options market participant is required by rule, 
regulation, or competitive forces to be a Member of the Exchange. 
Several market participants choose not to be Members of the Exchange 
and choose not to access the Exchange, and several market participants 
also access the Exchange indirectly through another market participant. 
To illustrate, the Exchange has only 41 Members (including all such 
Members' affiliate Members). However, Cboe Exchange, Inc. (``Cboe'') 
has over 200 members,\31\ Nasdaq ISE, LLC has approximately 100 
members,\32\ and NYSE American LLC has over 80 members.\33\ If all 
market participants were required to be Members of the Exchange and 
connect directly to the Exchange, the Exchange would have over 200 
Members, in line with Cboe's total membership. But it does not. The 
Exchange only has 41 Members (inclusive of Members' affiliates).
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    \31\ See Form 1/A, filed August 30, 2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002831.pdf); Form 1/A, filed August 30, 
2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002833.pdf); 
Form 1/A, filed July 24, 2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002781.pdf); Form 1/A, filed August 30, 2018 (https://www.sec.gov/Archives/edgar/data/1473845/999999999718007832/9999999997-18-007832-index.htm).
    \32\ See Form 1/A, filed July 1, 2016 (https://www.sec.gov/Archives/edgar/vprr/1601/16019243.pdf).
    \33\ See https://www.nyse.com/markets/american-options/membership#directory.
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    The Exchange finds it compelling that all of the Exchange's 
existing Members continued to purchase the Exchange's connectivity 
services during the period for which the Proposed Fee Increases took 
effect in August 2018. In particular, the Exchange believes that the 
Proposed Fee Increases are reasonable because the Exchange did not lose 
any Members (or the number of connections each Member purchased) or 
non-Member connections due to the Exchange increasing its connectivity 
fees through the First Proposed Rule Change, which fee increase became 
effective August 1, 2018. For example, in July 2018, fourteen (14) 
Members purchased 1Gb connections, ten (10) Members purchased 10Gb 
connections, and fifteen (15) Members purchased 10Gb ULL connections. 
(The Exchange notes that 1Gb connections are purchased primarily by EEM 
Members; 10Gb ULL connections are purchased primarily by higher volume 
Market Makers quoting all products across both MIAX PEARL and MIAX; and 
10Gb connections are purchased by higher volume EEMs and lower volume 
Market Makers.) The vast majority of those Members purchased multiple 
such connections with the actual number of connections depending on the 
Member's throughput requirements based on the volume of their quote/
order traffic and market data needs associated with their business 
model. After the fee increase, beginning August 1, 2018, the same 
number of Members purchased the same number of connections.\34\ 
Furthermore, the total number of connections did not decrease from July 
to August 2018, and in fact one Member even purchased two (2) 
additional 10Gb ULL connections in August 2018, after the fee increase.
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    \34\ The Exchange notes that one Member downgraded one 
connection in July of 2018, however such downgrade was done well 
ahead of notice of the Proposed Fee Increase and was the result of a 
change to the Member's business operation that was completely 
independent of, and unrelated to, the Proposed Fee Increases.
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    Also, in July 2018, four (4) non-Members purchased 1Gb connections, 
two (2) non-Members purchased 10Gb connections, and one (1) non-Member 
purchased 10Gb ULL connections. After the fee increase, beginning 
August 1, 2018, the same non-Members purchased the same number of 
connections across all available alternatives and two (2) additional 
non-Members purchased three (3) more connections after the fee 
increase. These non-Members freely purchased their connectivity with 
the Exchange in order to offer trading services to other firms and 
customers, as well as access to the market data services that their 
connections to the Exchange provide them, but they are not required or 
compelled to purchase any of the Exchange's connectivity options. MIAX 
PEARL did not experience any noticeable change (increase or decrease)

[[Page 22219]]

in order flow sent by its market participants as a result of the fee 
increase.
    Of those Members and non-Members that bought multiple connections, 
no firm dropped any connections beginning August 1, 2018, when the 
Exchange increased its fees. Nor did the Exchange lose any Members. 
Furthermore, the Exchange did not receive any comment letters or 
official complaints from any Member or non-Member purchaser of 
connectivity regarding the increased fees regarding how the fee 
increase was unreasonable, unduly burdensome, or would negatively 
impact their competitiveness amongst other market participants. These 
facts, coupled with the discussion above, showing that it is not 
necessary to join and/or connect to all options exchanges, demonstrate 
that the Exchange's fees are constrained by competition and are 
reasonable and not contrary to the Law of Demand as SIFMA suggests. 
Therefore, the Exchange believes that the Proposed Fee Increases are 
fair, equitable, and non-discriminatory, as the fees are competitive.
    The Exchange believes that the Proposed Fee Increases are equitably 
allocated among Members and non-Members, as evidenced by the fact that 
the fee increases are allocated across all connectivity alternatives, 
and there is not a disproportionate number of Members purchasing any 
alternative--fourteen (14) Members purchased 1Gb connections, ten (10) 
Members purchased 10Gb connections, fifteen (15) Members purchased 10Gb 
ULL connections, four (4) non-Members purchased 1Gb connections, two 
(2) non-Members purchased 10Gb connections, and one (1) non-Member 
purchased 10Gb ULL connections. The Exchange recognizes that the 
relative fee increases are 27% for the 1Gb connection, 10.9% for the 
10Gb connection, and 9.4% for the 10Gb ULL connection, but the Exchange 
believes that percentage increase differentiation is appropriate, given 
the different levels of service provided and the largest percentage 
increase being associated with the lowest cost connection. Further, the 
Exchange believes that the fees are reasonably allocated as the users 
of the higher bandwidth connections consume the most resources of the 
Exchange's network. It is these firms that account that also account 
for the vast majority of the Exchange's trading volume. The purchasers 
of the 10Gb ULL connectivity account for approximately 80% of the 
volume on the Exchange. For example, in April of 2019, to date, 
approximately 12 million contracts of the approximately 14.5 million 
contracts executed were done by the top market making firms of the 
Exchange's total volume. The Exchange considered whether to increase 
transaction fees and other fees in order to offset its costs as an 
alternative to increasing connectivity fees, however, the Exchange 
determined that increasing its connectivity fees was the only viable 
alternative. This is because the increased costs are more closely 
associated with connectivity, as well as the intense level of 
competition among the options exchanges for order flow through 
transaction fees.
    Second, the Exchange believes that its proposal is consistent with 
Section 6(b)(4) of the Act because the Proposed Fee Increases allow the 
Exchange to recover a portion (less than all) of the increased costs 
incurred by the Exchange associated with providing and maintaining the 
necessary hardware and other network infrastructure to support this 
technology since Exchange launched operations in February 2017. Put 
simply, the costs of the Exchange to provide these services have 
increased considerably over this time, as more fully-detailed and 
quantified below. The Exchange believes that it is reasonable and 
appropriate to increase its fees charged for use of its connectivity to 
partially offset the increased costs the Exchange incurred during this 
time associated with maintaining and enhancing a state-of-the-art 
exchange network infrastructure in the U.S. options industry.
    In particular, the Exchange's increased costs associated with 
supporting its network are due to several factors, including increased 
costs associated with maintaining and expanding a team of highly-
skilled network engineers (the Exchange also hired additional network 
engineering staff in 2017 and 2018), increasing fees charged by the 
Exchange's third-party data center operator, and costs associated with 
projects and initiatives designed to improve overall network 
performance and stability, through the Exchange's research and 
development (``R&D'') efforts.
    In order to provide more detail and to quantify the Exchange's 
increased costs, the Exchange notes that increased costs are associated 
with the infrastructure and increased headcount to fully-support the 
advances in infrastructure and expansion of network level services, 
including customer monitoring, alerting and reporting. Additional 
technology expenses were incurred related to the expanding its 
Information Security services, network monitoring and customer 
reporting, as well as Regulation SCI mandated processes associated with 
network technology. All of these additional expenses have been incurred 
by the Exchange since became operational in February 2017. 
Additionally, while some of the expense is fixed, much of the expense 
is not fixed, and thus increases as the number of connections increase. 
For example, new 1Gb, 10Gb, and 10Gb ULL connections require the 
purchase of additional hardware to support those connections as well as 
enhanced monitoring and reporting of customer performance that MIAX 
PEARL and its affiliates provide. And 10Gb ULL connections require the 
purchase of specialized, more costly hardware. Further, as the total 
number of all connections increase, MIAX PEARL and its affiliates need 
to increase their data center footprint and consume more power, 
resulting in increased costs charged by their third-party data center 
provider. Accordingly, cost to MIAX PEARL and its affiliates is not 
entirely fixed. Just the initial fixed cost buildout of the network 
infrastructure of MIAX PEARL and its affiliates, including both 
primary/secondary sites and disaster recovery, was over $30 million. 
The current annual operational expense (which relates 100% to the 
network infrastructure, associated data center processing equipment 
required to support various connections, network monitoring systems and 
associated software required to support the various forms of 
connectivity) is approximately $8.5 million. This does not include 
additional indirect expenses that the Exchange incurs that are 
allocated to the support of network infrastructure of the Exchange. 
These costs have increased over 10% since the Exchange became 
operational in February 2017. As these operational expenses increase, 
MIAX PEARL and its affiliates look to offset those costs through 
increased connectivity fees.
    A more detailed breakdown of the operational expense increases 
include an approximate 70% increase in technology-related personnel 
costs in infrastructure, due to expansion of services/support (increase 
of approximately $800,000); an approximate 10% increase in datacenter 
costs due to price increases and footprint expansion (increase of 
approximately $500,000); an approximate 5% increase in vendor-supplied 
dark fiber due to price increases and expanded capabilities (increase 
of approximately $25,000); and a 30% increase in market data 
connectivity fees (increase of approximately $200,000). Of note,

[[Page 22220]]

regarding market data connectivity fee increased cost, this is the cost 
associated with MIAX PEARL consuming connectivity/content from the 
equities markets in order to operate the Exchange, causing MIAX PEARL 
to effectively pay its competitors for this connectivity. The Exchange 
also incurred significant capital expenditures over this same period to 
upgrade and enhance the underlying technology components, as more 
fully-detailed below.
    Further, because the costs of operating a data center are 
significant and not economically feasible for the Exchange, the 
Exchange does not operate its own data centers, and instead contracts 
with a third-party data center provider. The Exchange notes that 
larger, dominant exchange operators own/operate their data centers, 
which offers them greater control over their data center costs. Because 
those exchanges own and operate their data centers as profit centers, 
the Exchange is subject to additional costs. As a result, the Exchange 
is subject to fee increases from its data center provider, which the 
Exchange experienced in 2017 and 2018 of approximately 10%, as cited 
above. Connectivity fees, which are charged for accessing the 
Exchange's data center network infrastructure, are directly related to 
the network and offset such costs.
    Further, the Exchange invests significant resources in network R&D, 
which are not included in direct operational expenses to improve the 
overall performance and stability of its network. For example, the 
Exchange has a number of network monitoring tools (some of which were 
developed in-house, and some of which are licensed from third-parties), 
that continually monitor, detect, and report network performance, many 
of which serve as significant value-adds to the Exchange's Members and 
enable the Exchange to provide a high level of customer service. These 
tools detect and report performance issues, and thus enable the 
Exchange to proactively notify a Member (and the SIPs) when the 
Exchange detects a problem with a Member's connectivity. The costs 
associated with the maintenance and improvement of existing tools and 
the development of new tools resulted in significant increased cost to 
the Exchange since February 2017.
    Certain recently developed network aggregation and monitoring tools 
provide the Exchange with the ability to measure network traffic with a 
much more granular level of variability. This is important as Exchange 
Members demand a higher level of network determinism and the ability to 
measure variability in terms of single digit nanoseconds. Also, the 
Exchange routinely conducts R&D projects to improve the performance of 
the network's hardware infrastructure. As an example, in the last year, 
the Exchange's R&D efforts resulted in a performance improvement, 
requiring the purchase of new equipment to support that improvement, 
and thus resulting in increased costs in the hundreds of thousands of 
dollars range. In sum, the costs associated with maintaining and 
enhancing a state-of-the-art exchange network infrastructure in the 
U.S. options industry is a significant expense for the Exchange that 
continues to increase, and thus the Exchange believes that it is 
reasonable to offset a portion of those increased costs by increasing 
its network connectivity fees, as proposed herein. The Exchange invests 
in and offers a superior network infrastructure as part of its overall 
options exchange services offering, resulting in significant costs 
associated with maintaining this network infrastructure, which are 
directly tied to the amount of the connectivity fees that must be 
charged to access it, in order to recover those costs.
    The Exchange notes that other exchanges have similar connectivity 
alternatives for their participants, including similar low-latency 
connectivity. For example, Nasdaq PHLX LLC (``Phlx''), NYSE Arca, Inc. 
(``Arca''), NYSE American LLC (``NYSE American'') and Nasdaq ISE, LLC 
(``ISE'') all offer a 1Gb, 10Gb and 10Gb low latency ethernet 
connectivity alternatives to each of their participants.\35\ The 
Exchange further notes that Phlx, ISE, Arca and NYSE American each 
charge higher rates for such similar connectivity to primary and 
secondary facilities.\36\ While MIAX PEARL's proposed connectivity fees 
are substantially lower than the fees charged by Phlx, ISE, Arca and 
NYSE American, MIAX PEARL believes that it offers significant value to 
Members over other exchanges in terms of network monitoring and 
reporting, which MIAX PEARL believes is a competitive advantage, and 
differentiates its connectivity versus connectivity to other exchanges. 
Additionally, the Exchange's proposed connectivity fees to its disaster 
recovery facility are within the range of the fees charged by other 
exchanges for similar connectivity alternatives.\37\
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    \35\ See Phlx and ISE Rules, General Equity and Options Rules, 
General 8, Section 1(b). Phlx and ISE each charge a monthly fee of 
$2,500 for each 1Gb connection, $10,000 for each 10Gb connection and 
$15,000 for each 10Gb Ultra connection, which the equivalent of the 
Exchange's 10Gb ULL connection. See also NYSE American Fee Schedule, 
Section V.B, and Arca Fees and Charges, Co-Location Fees. NYSE 
American and Arca each charge a monthly fee of $5,000 for each 1Gb 
circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb LX 
circuit, which the equivalent of the Exchange's 10Gb ULL connection.
    \36\ Id.
    \37\ See Nasdaq ISE, Options Rules, Options 7, Pricing Schedule, 
Section 11.D. (charging $3,000 for disaster recovery testing & 
relocation services); see also Cboe Exchange, Inc. (``Cboe'') Fees 
Schedule, p. 14, Cboe Command Connectivity Charges (charging a 
monthly fee of $2,000 for a 1Gb disaster recovery network access 
port and a monthly fee of $6,000 for a 10Gb disaster recovery 
network access port).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    MIAX PEARL does not believe that the proposed rule changes will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In particular, the Exchange has 
received no official complaints from Members or others who connect to 
it that its fees or the Proposed Fee Increases are negatively impacting 
or would negatively impact their abilities to compete with other market 
participants. Further, the Exchange is unaware of any assertion that 
its existing fee levels or the Proposed Fee Increases would somehow 
unduly impair its competition with other options exchanges. To the 
contrary, if the fees charged are deemed too high by market 
participants, they can simply disconnect.
    While the Exchange recognizes the distinction between connecting to 
an exchange and trading at the exchange, the Exchange notes that it 
operates in a highly competitive options market in which market 
participants can readily connect and trade with venues they desire. In 
such an environment, the Exchange must continually adjust its fees to 
remain competitive with other exchanges. The Exchange believes that the 
proposed changes reflect this competitive environment.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act,\38\ and Rule

[[Page 22221]]

19b-4(f)(2) \39\ thereunder. At any time within 60 days of the filing 
of the proposed rule change, the Commission summarily may temporarily 
suspend such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act. If the Commission takes such action, the Commission shall 
institute proceedings to determine whether the proposed rule should be 
approved or disapproved.
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    \38\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \39\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-PEARL-2019-17 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-PEARL-2019-17. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-PEARL-2019-17 and should be submitted on 
or before June 6, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10116 Filed 5-15-19; 8:45 am]
 BILLING CODE 8011-01-P